We have been dealing with inflation for a long time, and this situation negatively affects both our individual welfare and social harmony. Disputes and even conflicts between tenants and landlords are a good example of this. Last week, Mr. Mehmet Şimşek made an important observation regarding the imbalance in the housing markets. He stated that the price increases in housing markets, particularly rental inflation, can no longer be addressed solely through monetary policy, and that it’s necessary to increase housing supply.

 In fact, Minister Şimşek highlighted the importance of micro policies in the fight against inflation with a specific recommendation for a specific market. However, his statement somewhat fell short of acknowledging that, in countries like Turkey, the fundamental cause of inflation lies in the supply-demand imbalance in markets. In an economy where the annual policy rate is at a staggering 47%, if inflation is still stuck at around 50%, then the function of monetary policy in reducing inflation (without impoverishing everyone) has ceased. Turkey’s inflation is quite different from that experienced in Western countries in terms of volume, duration, and underlying causes. Simply copying policies from the FED or ECB would not yield significant results.

 Let’s state clearly that Turkey’s fundamental problem for years has been consuming more than it produces. Reducing consumption is not an easy task. Individually, when our income decreases, we cannot immediately change our consumption habits. Since society consists of individuals, consumption expenditures remain high despite falling income. Therefore, the necessary actions are to increase production, efficiency, and market competition.

 Here, the importance of microeconomic policies comes into play. Various policies can be implemented to increase labor productivity. Offering vocational and basic education and continuous development programs, making investments in technology and automation are among these policies. However, the more critical issue is the optimization of business processes. The fundamental problem with our SMEs is that owners think short-term and completely disregard expert opinions because they always think they know best! Efforts towards gaining corporate status should be supported.

 Another aspect of micro policies in fighting inflation is supporting competitive processes. Once pricing perception is disrupted, each firm follows the other into a cost-price spiral. The only organic element that can discipline this spiral is competitive pressure. Readers interested can revisit our previous articles on our views on competition, especially how the lack of competition in the service sector leads to inflation. Detecting competition violations is both difficult and time-consuming, but increasing competition is relatively easier. Barriers to market entry should be removed, and the production of new firms should be encouraged, where institutions like KOSGEB play a crucial role with their effective incentive mechanisms.  In conclusion, Turkey has reached the limits of monetary policy in combating inflation. If further impoverishment to the brink of hunger for everyone is to be avoided, this tightening should not be prolonged. The only healthy way to defeat inflation is by increasing production. Given that the public sector can no longer use interest rate instruments for long, what needs to be done is to foster local production and competition through local policies.